February 24, 2011

Credit Default Swaps Casino coming soon for everyone!

CHICAGO - OCTOBER 16:  A trader in the S&P 500...Image by Getty Images via @daylife
Ever felt excluded from the list of people who can (allegedly) buy insurance on their neighbor's house, and then burn it down? That's all about to change. The CBOE has announced that that on Tuesday, March 8, the Exchange will begin trading newly-designed Credit Event Binary Options (CEBOs) contracts. In essence these will be like Credit Default Swaps, accessible to everyone, which will have a $1000 payoff per contract in the event of a bankruptcy before contract expiration.

Credit Event Binary Options contracts allow investors to express an opinion on whether a company will experience a "credit event" (bankruptcy).   Due to inverse correlations between credit and equity markets, CEBO® contracts can be used as a hedging tool for individual stocks. The contracts also provide the advantages of price transparency available through a regulated exchange, currently unavailable in over-the-counter credit default swaps markets.

A CEBO contract has just two possible outcomes - a payout of a fixed amount if a credit event occurs or nothing if a credit event does not occur.

This sudden opening of the market to retail bets on corporate bankruptcy will have huge bilateral repercussions on every single asset class and we can only imagine what will happen when ordinary citizen will start gambling on companies defaults, it seems the race of Wall Street to compete with the Gambling business is taking a new turn, de facto encouraging everyone to bandwagon on the derivatives insanity that has brought us down.

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